mannyww5, Am I concerned about the Operating Cash Flow in this...

mannyww5,

Am I concerned about the Operating Cash Flow in this latest result?

No, not at all.

It is pretty standard due to the holiday period for Receivables to spike at the December balance date, and this past December the effect was more pronounced than previous years because Christmas fell on a Tuesday and many business closed off their books for payment on the prior Friday.

(Incidentally, I have came across several companies so far this reporting season who have cited something similar in relation to their Receivables’ payment cycle)

As you can see (below) from history, the DH is seasonally materially weaker for BRG due to the Working Capital bloat that occurs @ 31 December balance dates, with payments received in early January boosting June half cash flows (even though June halves are seasonally weaker from a Revenue standpoint).

It’s just the nature of the beast:

OCF By Halves ($m)
DH06: -9.5
JH07: 22.3
DH07: -3.1
JH08: 34.4
DH08: -19.9
JH09: 47.3
DH09: 13.8
JH10: 43.7
DH10: -3.4
JH11: 50.4
DH11: 7.4
JH12: 43.7
DH12: 2.0


I think the more relevant point to observe in this regard is how BRG’s December half Working Cap-to-Sales metric has trended improvingly over time:

Working Cap-to-Sales [December halves]
DH06: 26.0%
DH07: 25.0%
DH08: 29.3% (GFC!)
DH09: 22.8%
DH10: 21.9%
DH11: 20.5%
DH12: 20.1%

Because BRG’s supply chain is a long one, extending into multiple global distribution points, Working-Cap-to-Sales metrics will never be particularly low, but at least it is evident from the favourable improving trend, that it is an active that is being actively managed.


Finally, the “test” that I do to make sure the cash flow statement “gels” with the P&L is to compare:

EBITDA

with

Net Receipts (Payments from Customers less Payments to Suppliers and Employees) plus movements in working capital during the period in question.


If Net Receipts (adjusted for Working Capital) EXCEEDS EBITDA then that is a generally good thing because it probably reflects conservative accounting practice (e.g., the booking of non-cash expenses above the line).

Conversely, if EBITDA EXCEEDS Net Receipts (adjusted for Working Capital), then that is not a good thing because it probably reflects aggressive accounting practice (e.g., the capitalising of certain expenses or the reversing of provisions, which overstate P&L profits).


In the case of the DH12, the reconciliation looks as follows:

Net Receipts = $15.7m

Working Cap @ June, 2012 = $71.5m
Working Cap @ Dec, 2012 = $106.3m
=> Change in Working Cap = $34.8m

So, Adjusted Net Receipts = $15.7m + $34.8m = $50.5m, which is 2% greater than EBITDA of $49.7

In other words, a very clean result, with excellent cash conversion.

There are plenty of things to worry about in the world.

The quality of BRG's cash flows is not one of them.


Cam